Lower Interchange and Fraud Losses, Says Study

A new survey of debit issuers representing about 45% of U.S. debit traffic suggests the debit industry is living on less interchange but is also experiencing less fraud.

The 2013 debit issuer study is the eighth one from PULSE, the ATM and debit network made up of large banks, community banks and credit unions that is owned by Discover. PULSE worked with noted financial consultancy Oliver Wyman to conduct the study.

The survey is the largest and most comprehensive private industry studies of the debit industry conducted after the Federal Reserve put into place regulations implementing the Durbin amendment.

The amendment to the Dodd-Frank Act capped debit interchange for issuers with over $10 billion in assets and was intended to not affect the debit interchange income of smaller issuers.

The study’s most controversial finding suggested that all issuers, whether large or small asset, have taken hits to their debit interchange from the Durbin Amendment’s regulations.

As anticipated and reported in other surveys, large asset issuers took the biggest hit, seeing the interchange they earn on transactions that cardholders validate with their signatures move from 52 cents per transaction to 23 cents per transaction. On transactions which cardholders validate with PINs, large issuer interchange moved from 32 cents to 23 cents.

The survey found that small asset issuers also took a hit to their interchange, with small asset issuers seeing their signature debit interchange move from 47 cents to 45 cents and their PIN debit interchange move from 33 cents to 31 cents.

One in three small asset issues also responded that they expected to see further debit interchange declines in 2013.

PULSE said that 64 of its approximately 6,100 participating financial institutions took part in the survey and that these included large banks, credit unions and community banks and that 26 of the 64 were institutions of over $10 billion in assets.

The study found that all issuers had adopted similar strategies, to different degrees, to address their interchange losses.

The most popular strategies for all issuers were to cut costs in their programs, aim to lower fraud losses and changing their product structure by broadening the pool of depositors who received debit cards and increasing activation and use. Significantly, the fourth popular strategy was to cut rewards programs on debit cards, a tactic that 58% of large issuers and 21% of small issuers surveyed reported doing.

The combinations of tactics appeared to have worked since all issuers reported higher debit card income than the previous year, even though they all reported seeing lower debit interchange rates.

All the issuers cited similar reasons for the strong performance, including seeing debit card penetration into their depositor base move from 76% to 77%, card activation move from 66% to 68% and the number of transactions per card per account move from 18.3 in 2011 to 19.4 in 2012. Taken together, issuers reported seeing the money spent on their debit card, per card account, move from $8,326 in 2011 to $8,753 in 2012.

“Even in the face of significant regulatory challenges, issuers managed to grow their debit volumes in 2012 and expect further growth this year,” said Steve Sievert, executive vice president of marketing and communications for PULSE.